Morici: What to Look for in Tuesday’s Trade Deficit Report

Tuesday, analysts expect the Commerce Department to report the deficit on international trade in goods and services was $44.0 billion in February, up from $27 billion in mid-2009, when the economic recovery began.

This trade deficit subtracts from demand for U.S.-made goods and services, just as a large federal budget deficit adds to it. Consequently, a rising deficit slows economic recovery and jobs creation and limits how much Congress and the President may cut the deficit without sinking the economic recovery.

Rising oil prices and imports from China are driving the trade deficit up, and these are major barriers to creating enough jobs to pull unemployment to acceptable levels over the next several years. Were the Obama Administration and Republican leadership in Congress to address the trade deficit, economic growth, jobs creation and tax revenues would increase dramatically, and the federal deficit could be cut to manageable levels without fear of killing jobs creation.

Jobs Creation

The economy added 216,000 jobs March; however, 360,000 jobs must be added per month to bring unemployment down to 6 percent over the next 36 months. With federal and state governments trimming civil servants, private sector jobs growth must exceed 360,000 per month to accomplish this goal.

Americans have returned to the malls and new car showrooms but too many dollars go abroad to purchase Middle East oil and Chinese consumer goods that do not return to buy U.S. exports. This leaves too many Americans jobless and wages stagnant, and state and municipal governments with chronic budget woes.

Now, gasoline prices rising to $4.00 a gallon threaten to further reduce spending on homes and discretionary items made in the United States—leaving many U.S. businesses again scrambling for customers and pressured to layoff workers.

Simply, policies regarding energy and trade with China are not creating conditions for 5 percent GDP growth that is needed and easily could be achieved to bring unemployment down to acceptable levels.

In March, the private sector has added 230,000 jobs per month, but many were in government subsidized health care and social services, and temporary business services. Netting those out, core private sector jobs have increased only 157,000 in March—that comes to 50 permanent, non-government subsidized jobs per county for more than 5000 job seekers per county.

Early in a recovery, temporary jobs appear first, but 21 months into the expansion, permanent, non-government subsidized jobs creation should be much stronger.

Economic Growth

Since the recovery began in mid 2009, GDP growth has averaged 2.9 percent, disappointing Administration economists who have consistently assumed 4 percent growth in budget projections and forecasts for the job creating effects of stimulus spending.

Consumer spending, business technology and auto sales have added strongly to demand and growth, and exports have done quite well. However, soaring oil prices and the continued push of subsidized Chinese manufactures in U.S. markets have overwhelmed these positive trends. Now gasoline prices rising to $4.00 a gallon could significantly slow or kill the recovery and recent modest resurgence in jobs creation.

Administration imposed regulatory limits on conventional oil and gas development are premised on false assumptions about the immediate potential of electric cars and alternative energy sources, such as solar panels and windmills. In combination, Administration energy policies are pushing up the cost of driving and making the United States even more dependent on imported oil and indebted to China and other overseas creditors to pay for it.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan by 40 percent. It accomplishes this by printing yuan and selling those for dollars and other currencies in foreign exchange markets.

Presidents Bush and Obama have sought to alter Chinese policies through negotiations, but Beijing offers only token gestures and cultivates political support among U.S. multinationals producing in China and large banks seeking additional business in China.

The United States should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention divided by its exports—about 35 percent. That would neutralize China’s currency subsidies that steal U.S. factories and jobs. It is not protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it’s self defense.

Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.

Peter MoriciProfessor, Smith School of Business, University of Maryland